managing financial risk and loan performance in emerging markets
TRANSCRIPT
1Confidential Information – Copyright © First American Credco 2006
MANAGING RISK AND PERFORMANCE IN EMERGING MARKETS
ADDRESSING PERFORMANCE CONCERNSRisk Summit 2006Mark F. CatoneSenior Vice President, First American Credco
3Confidential Information – Copyright © First American Credco 2006
Market Dynamics/OpportunitiesThe Disparity Continues to Widen
Lower Costs of OriginationReduced Cost of CreditEasier AccessNew Products
Increasing Relative CostsExcluded from “New Model” scoring systemsSubject to Abusive Lending Practices
Prime Market Borrowers
Emerging Market BorrowersDisparity
4Confidential Information – Copyright © First American Credco 2006
Market Dynamics/ Opportunities Marketing Implications
Market Contraction and Growth 2000 - 2020
(4,000)(2,000)
02,0004,0006,000
White Black Asian Hispanic
Thou
sands
of Fa
milies
45 to 5435 to 4425 to 34Under 25
Brookings Institute White Paper Source: Thomas G. Exter, Ph.D.
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Emerging Market Borrowers Across All Income Levelsare Concentrated in Subprime Pools
Refinanced Mortgage Loans in U.S. - 2002 Percent Subprime by Income Level
11.2% 9.7% 7.6% 5.2%
38.5%33.2%
27.8%19.6%19.9% 20.7% 19.4%
13.4%
0%10%20%30%40%50%
Low Moderate Middle Upper White African-American Latino
Source: Separate and Unequal: Predatory Lending in America, Published by Acorn 2004
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The Consumer Portion• Pre-Loan Credit Counseling• Homeownership Planning• Monitoring• Loan Buyback as a Risk Management Strategy
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Market Dynamics/ Opportunities are Enormous
32
22
0102030405060
BorrowersMillio
ns of
Poten
tial B
orrow
ers
No FileThin File
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The Credit Portion• Favorable to the Consumer
– Add, Supplement, Build Credit– Keys Off of Housing as Predictive– Qualify for Best Loan Possible
• Lender Risk Management– Data Scrubbing & Integrity– Identity, Status Verification
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Case Study #1• Consumer A “Thin” file
– Full File contents (before):• 4 closed accounts & 1 open account• 19 months of recent current history• FICO scores 684, 605, 628• Fraud Alert
– Anthem File contents (after):• 4 closed accounts & 5 open accounts• 29 recent months of current history ; min. 12 mo. rent• 91 months total recent, open history• FICO scores 684, 605, 628• Anthem Score 701• Consumer contacted directly
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Case Study #2• Consumer B
– Full File contents (before):• Trades: 1 open, current; 1 closed; 7 collections (5 open)• 1 civil judgment (> 4 years)• 14 months of recent current history• FICO scores 611, 609, 486
– Anthem File contents (after):• Trades: 4 open, current; 1 closed; 7 collections (5 open)• 1 civil judgment (> 4 years)• 31 recent months of current history ; min. 12 mo. rent• 65 months total recent, open history• FICO scores 611, 609, 486• Anthem Score 589
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Case Study #3• Consumer C – “No file”
– Full File contents (before):• Trades: 1 open, current; 3 closed (1990’s); 1 closed
collection • 58 months of recent current history• FICO scores 658, 608, 649
– Anthem File contents (after):• Trades: 3 open, current; 3 closed; 1 closed collection• 58 recent months of current history ; min. 12 mo. rent• 95 months total recent, open history• FICO scores 658, 608, 649• Anthem Score 648
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Percent Meeting Alternative Credit Minimums x FICO
0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%
100.0%
0 - 45
9460
- 479
480 - 4
99500
- 519
520 - 5
39540
- 559
560 - 5
79580
- 599
600 - 6
19620
- 639
640 - 6
59660
- 679
680 - 6
99700
- 719
720 - 7
39740
- 759
760 - 7
79780
- 799
800 +
Score Range
Perce
nt Sa
tisfyi
ng Re
quire
ments
Anthem FICO• Requirements:
– At least 4 sources of NT data with at least 12 months of reported history.– Minimum of 12 months of rental history [Estimated].– Maximum 1 X 30 day delinquency on a rental tradeline.– Maximum 2 X 30 or 1 X 60 day delinquency on any tradeline.
13Confidential Information – Copyright © First American Credco 2006
Total Delinquencies Affordable s Market (quarter end)
• Over this time period NHSA’s high LTV 1st mortgage Private Label LLC loans total delinquency outperformed FHA by 507% & Prime by 107%
Total Delinquency LLC vs Market (balances)
0.00%5.00%
10.00%15.00%
Mar-0
1Ju
l-01
Nov-0
1Ma
r-02
Jul-0
2No
v-02
Mar-0
3Ju
l-03
Nov-0
3Ma
r-04
Jul-0
4No
v-04
Mar-0
5Ju
l-05
Total Private Label MBAA FHA MBA Prime
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Total Delinquencies High LTV sales vs. Market (quarter end)
• Over this time period NHSA’s high LTV 1st mortgage GSE loans total delinquency performed at 94% of Prime loans
High LTV GSE Sales vs Market (balances)
0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%
Mar-0
1Ju
l-01
Nov-0
1Ma
r-02
Jul-0
2No
v-02
Mar-0
3Ju
l-03
Nov-0
3Ma
r-04
Jul-0
4No
v-04
Mar-0
5Ju
l-05
Total GSE MBA Prime
15Confidential Information – Copyright © First American Credco 2006
Foreclosure % by Credit type (quarter end)
Foreclosure Balances
0.00%2.00%4.00%6.00%8.00%10.00%Ma
r-01
Jul-0
1No
v-01
Mar-0
2Ju
l-02
Nov-0
2Ma
r-03
Jul-0
3No
v-03
Mar-0
4Ju
l-04
Nov-0
4Ma
r-05
Jul-0
5
Portfolio Private Label GSEMBAA Nonprime MBAA FHA MBA Prime
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Credit CascadeAll Layered On Top of Existing Loan Underwriting
• Best Rate = Yes, Then Complete• Best Rate = No, Do Until Best Rate
– Full file• Update Balances
– Rescore• Update Disputed Derogatory Data
– Rescore– Thin File
• Build Rent 1• Build Rent Utilities 2• Build Rent Services 3
– No File• Build Rent• Build Rent Utilities• Build Rent Services• Build Insurance